China Focus

A New Business Model

By Dr CS Lim

Some weeks ago while in Chengdu, I talked about the scale
of furniture enterprises in Sichuan
during a local interview. Sichuan has
some of the world’s largest panel
furniture manufacturers such as Quan You,
Ming Zhu, Shuang Hu, Nan Fang. This is worth
discussing as there does not seem to be any
other manufacturers of such scale elsewhere in
the world.

Doing business is an investment with the hope
to gain the maximum return with every dollar
put in. As a result, return on investment would
be a key consideration. It is not always the case
that the greater the investment, the higher the
return. Every industry, every market and every
product, has different scale requirements and
limitations. Economies of scale sometimes
cannot be achieved if investments are too low
and in turn provide little return. The investment
size has to be right. Theoretically, the point of
diminishing returns marks the best investment
scale. Exceeding this point maximum return will
be lost.

I reckon few in the Chinese furniture industry
would study this. Perhaps some would expand
incessantly due to the encouragement by other
leaders, which leads to inefficient, even futile
investments.

In the manufacturing of panel furniture, the
production equipment used are not complex.
Some Sichuan entrepreneurs complicate the
simple things. We may say in no exaggeration
that panel furniture should be close to the
market and be market-oriented. However,
our Sichuan friends have turned the business
into production-oriented, setting up a large
factory in Sichuan and distributing products
nationwide. In the process, money is lost on the
road. The logistics cost in China takes up 13%
of sales cost, 5% higher than that of America
on average.

Instead, panel furniture enterprises should
scatter their production in every corner of the country. Production via numeric-controlled
machinery need not be that large scale and
complicated and certainly should not be built
not for show. Production should be close to the
market for a variety of reasons:

* Saving distribution cost: it is quite unlikely
that logistics cost would be lower in
future unless price of energy prices falls
substantially.

* Serving customers nearby: If a factory is close
to the market, it will have a better appreciation
of the needs of local consumers, and at the
same time, is able to supply furniture made
to order. Most custom made furniture are
panel furniture. With the rise in the income
of the Chinese, the demand for customized
furniture would grow.

* Different cultures: With differing cultures in
the different regions, the need for furniture
in areas such as functions, appearances and
sizes would differ. It cannot be the same
throughout the country.

* After-sale service: Occasional damages
are unavoidable during transportation and
improper use by customers etc give rise to
repair work needed. Only close proximity
can address this. While local contractors can
also deal with such scenarios, it is never as
good or prompt as services provided by own
factories.

* Local protectionism: Even within a country,
some form of local protectionism may exists.
Take tendering of projects as an example,
project owners would take logistics cost and
after-sale service into account, with tendancy
towards factories within the province or
nearby.

The larger the scale of panel furniture
production, the higher cost of production than
that of an ideal scale. Dr. Schuler, an expert
from the Ministry of Agriculture in America,
criticized that in the furniture industry, the
majority of producers lack communication with
the end consumers. They often rely excessively
on retailers to establish the demands and
expectations of the customers.

He believes there should be a new business
model in which manufacturers can learn to
get close to end consumers to better meet
consumers’ needs for profitability. This
depends on better marketing ability and better
sales network, efficient and flexible production
capabilities, and timely supply.

What he said refers to the competitive theory of
Michael Porter. Although somewhat theoretical,
his perspective is right. Factories have to be
close to market, especially panel furniture and
customized furniture (which majority are panel
furniture).

In his article entitled “Past and present of
the American furniture industry... will there
be tomorrow?” concerning competitive
tactics of American furniture industry, Schuler
emphasized repeatedly some obvious
negligence: lack of effective market analysis,
lack of communications with the customers and
inflexible manufacturing strategies.

This is correct. It is the same in the Chinese
furniture industry. Take for example, how do
gigantic panel furniture manufacturers located
in remote Chongzhou, Sichuan, understand the
national market? How do they communicate
with the customers? And how do they respond
to the different demands of the various markets?
This new business model is certainly worth
pondering over, not only for panel furniture
manufacturers, but also for us all.

DR LIM CHEOK SIN
President, Council
of Asian Furniture
Associations
Professor, Beijing
forestry University
, currently the
Chairman of the
Council of Asian
Furniture Association
(CAFA). He read at
Nanyang University
in Singapore and
completed his PHD
at Beijing University
of Forestry. He holds
a Post Doctorate
from Michigan State
University and is a
visiting scholar there.
Dr Lim has been active
in the Singapore
furniture industry,
chairing both the
Singapore Furniture
Association and
Furniture Association
of Asia and Pacific
previously.

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